14 September 2008

Ode to Price Gouging

[I first wrote this after Hurricane Ivan (2004) to a discussion group I'm in. It's relevant again after Ike! I've added some of the follow-up discussion that we had, too.]

With all of this hub-bub about price gouging after the hurricanes, I'd like to step up and defend the venerable practice.

Price gouging is not only not bad, it is good. It follows the laws of supply and demand. So, it helps ensure that the people who need the goods the most will get them because they are willing to pay the higher prices. It keeps the well off from hoarding supplies, because at high prices they're only going to buy what they really need.

Consider the case of chain saws, often needed for tree clean up. Who should get the last 10 chain saws at Home Depot? The first ten schmucks that show up that morning? Or the guy with a nine month pregnant wife and two big oaks in his driveway (who is happy to pay a little more) ?

In some cases price gouging could even ensure that more people get the services they need. Consider chain saws again. A lot of people might have big trees down in their yards and not want to overpay. But, an enterprising person could buy the high priced chain saw as an investment and then go clearing his neighbors yards for a small fee. It's a win-win-win situation (entrepreneur-neighbors-retailer). Or a group of people might pitch in together to buy a high priced chain saw and then share it. Either way, if the first 10 guys with $50 get the chain saws, they've no real incentive to share or even to try to work clearing others' yards -- because the price they paid does not reflect the real value of the chain saw.

Some might argue that gouging is unethical in the case of necessities. But, the same arguments still apply. Who should get the last case of bottled water? The person who doesn't like tap water and got there first? (And, who likes Florida Texas tap water?) Or the person whose home water supply is off due to storm damage? We know that in the U.S. there will be adequate disaster relief and no one's in real danger of starvation. A little price gouging will keep supplies going to those who need them the most until the relief arrives.

Response/objection 1:" retailers would be hesitant to gouge because it may lose them business ... caused by the ill will."

That's certainly a factor. I think that this is a good and natural check on excessive gouging. The problem is that Florida and many states apparently have laws against price gouging.

And, I thought of another example of the positive effects of legalizing and encouraging price gouging. People from out of the area could see the opportunity and load up the truck with chain saws and drive down to the hurricane to sell them at a profit. ... In the process maybe undercutting the greedy Home Depot manager. See how the free market fixes it's own problems?Response/objection 2:"The question seems to be an ethical one. We're talking about taking advantage of people in desperate times. .... There is nothing inconsistent with having a free market but also believing in giving charity."

We're all in violent agreement it seems. I certainly said nothing against charity, at any time or any place.

But, let's be honest about human nature -- you can expect the opportunists to arrive on the scene a lot sooner than the church ladies. If it's an emergency, why should the government impede this flow of goods? Like we do nature's scavengers, we can disdain the people that would do this, but to be honest we must admit that they are filling a useful role.

It is my understanding that Florida has laws against price gouging on the books now, which is why I brought this up. When the government decides to protect people from price gouging what they really end up stopping is the increased supply that market pricing would bring to a region that desperately needs it.

Response/objection #3:"[I went through a Hurricane when I was 12.] We filled up our bathtubs with water and rationed the use till we got water back. Four or 5 days. .... Price gouging made the local news and there were some human interest stories afterward about the effects."

The question is, how would these people have gotten water without the gougers? Expensive water is better than no water. Without the gougers you may have been watching a news story of how many people were dead or sick due to dehydration or water borne disease.

Disaster relief services would certainly have been better for those people. I support disaster relief. But, we should think of gougers as the safety net of disaster relief. Obviously, in this case, they got there first and their product was desperately needed.

If the gougers disgust you, the best response is not to remove this safety net by making it illegal. The answer is to improve the speed and efficiency of disaster relief so that they will be put out of business.